Kwacha Weakness To Weigh On Zambian Vehicle Sales In 2019

Zambia’s total vehicle sales will contract in 2019 driven by a depreciating kwacha, which will render vehicles more expensive as the market is heavily reliant on imports to satisfy domestic demand.

We believe the prospects of a depreciating Zambian kwacha will negatively impact the import-reliant vehicle sales market, as the cost of importing vehicles escalates. Our Country Risk team expects the kwacha to remain on a weakening trend given poor investor sentiment driven by fiscal irresponsibility, a large stock of foreign currency denominated debt and poor real rates. In line with these factors our Country Risk team expects that the kwacha will fall from an average of ZMW10.48/USD in 2018 to ZMW12.34/USD in 2019 and to ZMW12.9/USD in 2020. We have therefore revised our vehicle sales forecast from an initial 3.3% expansion in newly registered vehicles (new registrations include new and used vehicles registered for the first time) to a 15.7% decline for 2019 (see chart below). Our 2019-2028 average annual growth forecast now stands at 0.3%.

We believe passenger vehicle sales will be adversely affected by the weak currency as Zambia exclusively relies on the importation of passenger vehicles, mainly from Japan which accounts for more than 60% of imports, and South Africa with about 24% as of 2018. Passenger vehicle sales growth is currently restricted by structural issues such as low income levels and unemployment as Zambia's unemployment rate is set to average 7.6% over 2019, as a proportion of the labour force. We have therefore revised our 2019 passenger vehicle sales forecast from an expansion of 3.3% to a contraction of 15.5% as the importation of vehicles becomes too expensive for consumers as a result of the weakening currency. Due to a large portion of passenger vehicles making up total vehicle sales, this will result in added pressure on our total vehicle sales forecast.

We believe commercial vehicle sales in 2019 will experience downward pressure as prospects for Zambia’s construction industry deteriorate and increased taxes in the mining sector hampers investments. Our Infrastructure team believes construction activity will contract by 2.3% in 2019 amid higher royalties and taxes on mining companies, which will increase operating costs for firms, pushing some of the mines into loss-making positions and discouraging further investment. We believe these measures will hurt demand for commercial vehicles in 2019.

In addition, we believe the government will not be able to finance its expansive infrastructure spending plans as international lenders have signalled their unwillingness to continue offering loans to the country without fiscal reform. We have therefore revised our commercial vehicle sales forecast from an initial 11.3% expansion to a 16.2% contraction in 2019, as demand is hampered due to the abovementioned factors.